Distributing lump sum death benefits

United Kingdom

Trustees almost always have a discretion to determine to whom a lump sum death benefit is paid. Most of the time it will be obvious who the beneficiary should be. However, sometimes it will not be so easy. The following are some tips for trustees where there is any element of doubt about the appropriate beneficiary:

  • Understand to whom the scheme rules allow the lump sum to be paid. Rules often provide for the class of eligible beneficiaries to include a person who was a dependant of the member. If benefits are being paid to a dependant, check how the rules define dependency; this can vary significantly from scheme to scheme.
  • Obtain a copy of the member's nomination form (if any). Trustees are not usually bound to follow the nomination form, but must obviously give it serious consideration. The weight given to it will depend on issues such as the age of the form and any changes in circumstances since it was completed.
  • Investigate the member's personal circumstances. In particular, determine whether the member was married or had children. If the member is divorced, checks should be made for any court orders requiring any of the lump sum to be paid to the former spouse. It may also be appropriate to investigate whether the member had an unmarried partner and the nature of that relationship. For example, how long it had been going on and whether the partner was financially dependent on the member.

Obtain a copy of member's will (if any).

Ask each known potential beneficiary to confirm their relationship with the deceased, both in terms of family ties and financial dependency. It may also be appropriate to ask if they are aware of any further potential beneficiaries. Obtain marriage and birth certificates (for any children). Ascertain who is responsible for looking after any children following the member's death. If there is any element of doubt, ask for such documentary evidence of financial dependency as is available.

If statements from beneficiaries are contradictory or allegations are made against other possible beneficiaries, give the relevant beneficiaries the opportunity to comment.

Making a direct payment to a beneficiary is not the only way of distributing a lump sum. It may be more appropriate to make a payment to a trust, particularly where there are minor children involved. Sometimes the trustees may be asked to make payment to a family trust which has already been established. Care should be taken that this does not result in a payment to someone who may not be a beneficiary under the scheme rules, eg. future children from a second marriage of the member's spouse.

Where the case is at all complicated, someone should prepare a summary for the trustees, perhaps with a recommendation. However, full supporting papers should also be provided to the trustees so that they have evidence to agree or disagree with both the summary and the recommendation. This should reduce the chance of challenges on the grounds that the summary was mistaken or unfair or that the trustees failed to take into account all relevant factors.

Ultimately, trustees must make proper enquiries and take a decision based on all relevant factors, setting aside their own political, religious or moral views and prejudices and ignoring any other irrelevant factors. If they do this, then their decision should not be successfully challenged.

For further information on this issues, please contact Nigel Moore at [email protected] or on +44 (0)20 7367 3405.